Many first-time investors who want to buy property assume their price range is limited to the amount of cash they own. Obtaining a buy to let mortgage allows you to expand your portfolio faster than buying with cash and can give you a much higher return on your investment.
In this article, we will discuss just what mortgages are, the process of getting one and just how they can help you build your own property portfolio.
What is a mortgage?
A mortgage is a loan you can borrow from various lenders, most notably a bank, that you put towards buying a property. Many people use this to buy properties for themselves to live in, but others utilise buy to let mortgages to buy properties in order to rent out.
Typically, the maximum amount you can borrow from a lender towards a BTL property is 75% of the purchase price. This is paid back by the buyer in instalments over the mortgage term, which can be anything from 10-30 years. The property you’ve bought can be sold before then- it just means you have to pay off the mortgage you obtained sooner rather than later.
What can I use a mortgage for?
You can use a mortgage for most properties providing they are:
- Habitable – so there’s a kitchen and bathroom, and somebody could live there in its present state.
- Large enough- most lenders won’t touch any property below 300 sq m
- It must be of “standard construction” – so it’s not made of wood or concrete, and it’s not a mobile home or anything like that
- You must want the loan to run for at least a couple of years
Every lender will have their own criteria as to what they will and won’t lend on. Some will only consider properties in certain areas for example, whereas others are more open minded. Most will pay attention though should your property meet the requirements above.
Interest only vs repayment mortgages
There are two main types of mortgages available on a Buy to Let property- interest only or repayment.
As the name suggests, interest only mortgages mean you only pay off interest on the money you’ve borrowed each month. You will owe the full amount by the end of the mortgage term.
Repayment mortgages require you to pay off a portion of the mortgage as well as interest every month. The idea is that by the end of the mortgage term you will own your property 100% after having fully paid off what you’ve borrowed.
We feel that interest only mortgages are more practical when purchasing a Buy to Let property. A repayment mortgage requires you to pay more off every month which can heavily impact your rental returns on your property to the point where it’s hardly worth it. An interest only mortgage means you can pay off less- bear in mind also you are free to sell the property before the mortgage term expires on an interest only meaning you can pay it off easily (providing you at least get your money back at resell value).
What is required for a mortgage?
Since the financial crash back in 2007/08, lenders are much more restrictive in terms of who they lend to. Not just anyone can get a mortgage anymore. A mortgage broker can give you a more extensive insight into the intricacies but the basic criteria as to what most lenders look for is-
- Someone in a full-time job earning good money
- A home-owner
- Good credit history
- Owns an investment property already (preferable but not essential)
This type of borrower clearly has some degree of experience (without being over-extended), has a steady source of income elsewhere to service the debt, and has a track record of managing credit.
It’s very possible for someone who doesn’t meet one or more of these criteria to get a mortgage. It’s just that the further you diverge from the “ideal customer”, the more restricted your choice of lenders will be.
A mortgage broker is a great option as they inform you of all the available products out there and advise you on the best options to take. It’s best to employ a professional in this field, particularly if you’re a first-time buyer and slightly inexperienced.
If you’re buying off plan property, you will get a Decision In Principle (DIP) once you and your broker are satisfied with the mortgage rates. This is confirmation that the lender will almost certainly lend to you once your property is closer to completion. This is offered early on as to definitively confirm you can actually get a mortgage- after all, the last thing you want is to get a few months away from completion only to find you can’t get lending.
Your broker, on your behalf, will make a full mortgage application. Your broker will inform you of the information you need to provide should they come back requesting anything further. Your DIP will help you at this stage as it shows you’re organised and creditworthy.
The next step is valuation. The lender will send a surveyor to judge the value of the property and the amount it expects to receive in rent every week/month. If you’ve bought in a good area with trusted developers who’ve done their research on all of this, then any potential problems are minimised, and you can breathe easy.
If the valuer is satisfied, all that’s left now is to wait until completion for the mortgage funds to be sent to your solicitor and then subsequently to the vendor.
And that’s the mortgage process from a layman’s perspective. A mortgage broker is ideal for this process and they can explain the steps in more detail, but hopefully this gives you a summary of what to expect.
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